Monday, April 14, 2014

Confessions of a Stock Picker

~Written ByPriyankar
Sarkar

Value investing is a
concept which was first coined by the towering intellect Ben Graham.He wore
many hats viz, as an economist, investor, author and professor. His concept was
fairly simple which states if an investor can buy an asset worth one rupee or
less than that, the investor should be happy. If an asset is available at 50
paise to a rupee, the margin of safety is said to be higher compared to an
asset selling for 70 paise to a rupee. The greater the margin of safety, the
greater the chance of making lucrative returns in the equity markets.

The oracle of Omaha, Mr. Warren E. Buffett is the current mayor of Graham’s
school of thought. Mr. Buffett has helped evolve the concept of value over a
period of time.The sage of Omaha and his alter ego, Charlie Munger, suggest
that we should buy great companies at reasonable prices and hold it till
eternity! Other investors such as Philip Fischer, Sir John Templeton, Peter
Lynch had different variations of value investing Lynch asks us to diversify
whereas Buffett tells us to concentrate. There are different ways to go to
heaven, choose the one which best suits you!

Almost all B-schools teach that more the risk, more the return. Value investing
is quite the contradictory. It says lesser the risk, more the return since the
first aim of a value investor is to cut down risk. Value investing also defies
the efficient market hypothesis. Great investors have proved time and again
that the financial markets are efficient most of the time but mispricing does
exist. Some argue that since data and information are available to us instantly
(thanks to the Internet) and hence the markets are always efficient. But who is
processing that information? It is the human brain, which is irrational!Human beings “processing
information” determine prices. Therefore, stock prices are not always rational.It is
our job to figure out the discrepancy between price and intrinsic value. More
the discrepancy, more the margin of safety!

However, I feel the concept of value investing has evolved over the years. What
value are we referring to? Is it simply buying cheap assets? Is it prospective
value, enduring value or is it valued based on history? These are some of the
difficult questions which I often ponder on as a student of ‘Graham and
Buffettsville’. The predictability of cash flows in a business also acts
as a margin of safety thus providing value. When Dalal Street was in the back waters
in the early 1990s, there was a stock which was then recently listed –
Container Corporation of India Ltd. It is a PSU (Public
Sector Undertaking). Most of the investors did not understand the
business model of the company and therefore did not show any interest. There
was hardly any liquidity in the market for this particular scrip. However, one
of my acquaintances saw this as an opportunity and invested in the company. The
rest is history. The stock has multiplied more than 50x over the last decade.
This has taught me two lessons: liquidity per se has nothing to do with value
and the fact that most of the investing world does not understand a company
which I do in itself provides a margin of safety. This has been elucidated by
Buffett over the last five decades. He has termed this as “circle of competence”
– invest in businesses which you understand.

Experience is the best teacher! I vividly remember having picked a stock named
Agro Tech Food Ltd in July 2008. Having discussed this stock with some of my
friends (who are also die hard value investors), they were not convinced of
this idea and they tried to dissuade me from buying the stock. Since I had
conviction, I went ahead and bought the stock. The stock has given me a
whooping return of almost 400% since then. It demonstrates that as value
investors we may frown at each other’s stock picks but the underlying principal
remains the same. As Rakesh Jhunjhunwala put it very aptly when he said
that the two most difficult adjectives in English language are beauty in a girl
and value in a stock – it differs from person to person!
To create wealth in the stock market, one needs to be a contrarian. Independent
thinking is vital. To quote Buffett“A public opinion is no substitute for thought”. Along with keeping an open and
independent mind, I would say let common sense prevail!

About Priyankar Sarkar:

Priyankar Sarkar is a passionate stock picker. He
recently completed his MBA from SIBM-Bengaluru. His hobbies include reading,
playing squash, chess, cricket, networking and gaining wordly wisdom. A keen
follower of Hindustani Classical music. He has been an amateur investor
for the last seven years in the Indian Capital Markets.

Hi there, do you have an option where readers can subscribe to your blog posts by email? Its a lot easier to read blog posts on email than by visiting the blog, specially since google reader has been decomissioned.

Priyankar - must confess this is a deceptive article - in its simplicity. Brilliant to be more precise. If one can add, there could 'value picks' for people who fancy Bajaj Auto - which has a strong history of rewarding its investors with huge dividends (tax-free) and as a scrip keeps going up steadily (capital appreciation).Please keep sharing these nuggets!

Well written piece, my congratulations. However, would also suggest that CAPE projections ( cyclically adjusted returns , developed by Prof Schiller ) be used as a guiding principle when it comes to the subjectivity of value described in the write up.

After going through the article, I reach to its quintessence that there are two main ideas that value investors must master before investing. They are ‘value’ and ‘fluctuation’. Whilst one is considering an asset, one must have an understanding of its intrinsic value. When its price is below the value, it’s time to buy and when its price is above, it’s time to sell. Values are not fixed; they fluctuate and influence an asset’s current value. Some see the asset as an opportunity to invest, others see it a potential downfall. It absolutely differs from a person to person.

Value investing is a fascinating doctrine and Priyankar has explained in a sophisticated way. To this effect, Shakespeare quotes, “There is a tide in the affairs of men which, taken at the flood, leads on to fortune”.

Always admired the quote at the end, "Public opinion is no substitute for thought"..Even a thousand posts will not do justice to the magnitude of the concept..But brilliantly put in a nutshell..Cheers!